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SAN FRANCISCO -Fitch Ratings upgraded Oregon's general obligation rating to AA from AA-minus yesterday as the state prepares to bring $200 million of bonds to market for a new basketball arena at the University of Oregon.

The rating upgrade "reflects sustained revenue performance and growth in overall reserve levels despite the economic downturn, which to date has only moderately affected the state," Fitch said in a report.

The agency said Oregon's new rainy-day fund - created by lawmakers last year - helped the state garner the upgrade and helps mitigate its especially heavy reliance on personal income tax receipts, which tend to be sensitive to ups and down in the economy.

Fitch called the state's reserves, which include the growing rainy-day fund, "substantial" at nearly $600 million, or 9% of annual revenue. It predicted that the total would rise to $900 million by the end of the current biennium.

"We all knew that when the Oregon legislature agreed to create a new rainy-day fund last year that the credit rating agencies would respond positively," said Treasurer Randall Edwards. "This is another affirmation of the hard work of many individuals to shore up the state's fiscal health."

The upgrade brings the Fitch rating to the same level as the other rating agencies. The state is rated AA by Standard & Poor's and Aa2 by Moody's Investors Service.

The upgrade comes as the state prepares to sell $200 million oftaxable bonds for its flagship public university on June 17. The bonds will finance a 12,500-seat basketball arena for the Oregon Ducks. At $227 million, the arena is said to be the most expensive on-campus college basketball venue in the nation. It will replace McArthur Court, a 9,087-seat venue that was built in 1926 and is affectionately known as "the Pit."

The Eugene-based university plans to sell fixed-rate bonds maturing over the next 30 years. It decided to go with an all-taxable deal to give it flexibility to raise revenue from naming rights, advertising, and other sponsorship at the arena, according to Kate Cooper Richardson, Edwards' chief of staff.

She estimated that the university will pay an interest-rate premium of about 1.25 percentage points over tax-exempt debt. The school previously issued $27.4 million of taxable bonds to acquire land for the project.

Construction is scheduled to begin late this summer and finish in the fall of 2010. Construction could be delayed as the school seeks zoning approval for the project. It recently found out that it would have to seek a conditional-use permit for the project from the city of Eugene because the arena will increase traffic and congestion in its neighborhood. The university is usually exempt from the local zoning approval process.

The bonds will be repaid from athletic department revenues - including ticket sales and donations - with a backup pledge from the University of Oregon Legacy Fund, a $111 million endowment started with a $100 million donation from alumnus Phil Knight, the founder of Nike Inc., the world's biggest athletic shoe maker. The school expects the Legacy Fund to grow to more than $643 million over the next 30 years, even after $84.4 million of withdrawals to pay debt service on the arena. The bonds will also carry the state's GO pledge.

Citi is the underwriter on the deal. Public Financial Management Inc. is the financial adviser. Kirkpatrick & Lockhart Preston Gates EllisLLP is bond counsel.